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Benjamin Spillman

Profits rise for Nevada airline

21 April 2009

LAS VEGAS, Nevada -- Don't tell managers of Allegiant Travel Co. that airlines or Las Vegas tourism operations are toxic assets.

The parent company of Allegiant Air and Allegiant Vacations on Monday reported earnings of $28.2 million, or $1.37 per share, for its first quarter, up sharply from $9.7 million, or 47 cents per share, a year earlier.

Allegiant, which in recent years has risen from obscurity to become the sixth-largest carrier at McCarran International Airport, reported the strong quarter despite macroeconomic forces that have badly hurt the airline industry and Las Vegas-based businesses.

"The first quarter was superb," Allegiant President and Chief Executive Officer Maurice Gallagher said. "This quarter marked a return to capacity growth after last year's pullback."

In addition to fighting bad economic headwinds, Allegiant posted the strong quarter despite lower airfares.

During the first quarter of 2009, the airline's average fare was $74.52, down 14.3 percent from first quarter 2008.

The fare decrease was offset by a 26.7 percent decrease in operating expenses per passenger, from $102.86 in the first quarter of 2008 to $75.42 in the most recent quarter.

Total operating revenue increased 6.7 percent to $142.1 million and the operating margin jumped 20.5 percentage points to 31.3 percent.

Allegiant specializes in flying customers from noncompetitive small-town airports to vacation destinations such as Las Vegas, Florida and Arizona.

The company has long been willing to sacrifice market share for profit and was an early adopter of "unbundling," the practice of charging customers separately for everything from seat assignments to checked bags. Such practices put Allegiant out of the mainstream among U.S. carriers, but are apparently good for the bottom line.

The contrarian approach to running an airline also applies to its role in the Las Vegas tourism economy. Allegiant is thriving as room rates and overall visitation decline and resorts struggle.

"Our Las Vegas business is doing well at the moment, and the unfortunate reality is that the same things that are helping us are hurting most other Las Vegas businesses," said Robert Ashcroft, Allegiant's vice president of planning. "Vegas right now is an absolute bargain because there are not enough visitors to fill up the rooms, even at terrific discounts. That's hurting the casinos, the city, the state -- but it's helping us because the cost of a Vegas vacation is really low, and that's stimulating demand for our flights."

The airline was also helped by fuel costs that fell 50 percent. Unlike other airlines, Allegiant doesn't hedge fuel purchases. It also saves money by flying older, MD-80 aircraft which use a lot of fuel.

The inefficient aircraft and lack of a hedge could hurt Allegiant when fuel prices rise. But in the meantime the company is benefiting greatly from the current price.

In the second quarter Allegiant expects 20 percent departure growth. The airline now has 116 routes.